Though both are methods of assessing a firm, there is a substantial distinction between intrinsic value and market value. Regardless of market value, intrinsic value is an estimation of the true worth of an organisation.
Market value is the present worth of a business as indicated by the price of its stock. Because of this, market value may be much greater or lower than intrinsic value. The term “market value” is also frequently used to describe a publicly listed company’s market capitalization, which is calculated by dividing the number of outstanding shares by the current share price.
Intrinsic Value
A key statistic used by value investors to evaluate a firm is intrinsic value. The theory holds that it is desirable to invest in businesses whose genuine worth is higher than the market’s current estimate of it. Fundamental analysis is a subset of intrinsic value. When determining the value, both concrete and intangible aspects are taken into account, such as financial accounts, market research, and the business plan of the organisation.
The process of determining a company’s intrinsic worth is inherently challenging. Estimates of the true worth of a firm might differ significantly amongst experts due to all the potential factors involved, such as the value of the company’s intangible assets.
Some analysts use discounted cash flow analysis to factor in potential future earnings, while others just use the present liquidation value or book value as reported on the most recent balance sheet of the firm. Furthermore, as the balance sheet is a corporate document prepared internally, it may not be a perfectly accurate picture of assets and liabilities. This presents a challenge.
Market Value
Market value, which is determined by a company’s current stock price, rarely reflects its true current value. Instead, market value is more or less a reflection of how the general public feels about a firm. The market value indicates supply and demand in the investment market, or how ready (or not) investors are to invest in the company’s future, which explains why. Understanding how to value illiquid assets, such as real estate and company lines, is another challenging aspect of figuring out market value.
If there is a significant demand for investments, the market value will often be higher than the underlying value, sometimes leading to overvaluation. The converse is true if there is a lacklustre demand for investments, which may lead to an undervaluation of the business.
